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Power in Practice: A Coaching Program to Last a Career

An in-depth analysis of advisors’ books of business is vital to understanding the value of their practices

Financial advisors may be great financial guides for their clients, but that doesn’t mean they’re good business people. Nevertheless, in the independent channel, an advisor’s work includes running a business. This becomes particularly evident when we look at numbers.

Beyond revenue, many advisors don’t spend enough time understanding the profits of their firms. That’s why in our third workshop, part of Commonwealth’s Power in Practice coaching program, the focus is on money. Specifically, the workshop addresses analysis of the advisor’s book of clients; ongoing production enhancement; analysis of the advisor’s fee structure; analysis of the firm’s financials; and valuation of the practice itself.

Analysis of the Advisor’s Book of Clients

Advisors understand the concept of the 80/20 rule, but it is only when they see their revenue by household that they begin to internalize it. That internalization is the difference between intellectually understanding and doing something with the data and information gleaned.

In the workshop, the questions asked require advisors to calculate:

The number of households they have

The average revenue per household

The percentage of households that account for 80% of revenue

The households that account for 80% of revenue that do not get enough time and attention

The households that account for 20% of revenue that get excessive time and attention

The households that account for 20% of revenue that the advisor believes he or she has to keep because of some existing relationship

The households that are of great value to the firm because they generate referrals or have some specific contribution, regardless of monetary reward

The five to 10 clients whom they most want to replicate

This analysis makes the advisor aware of the specific dynamics of his or her book. At this stage in the workshop, however, understanding the makeup of the book does not incite an advisor to consider taking action. Perhaps this is because of the personal relationships that the advisor has with clients, a sense of moral obligation, or not knowing what to do with clients who may no longer be a good fit for the firm. Many advisors keep all clients until they realize that they actually lose money on some of them—even then, an advisor’s personal value system takes precedence over everything else. Full appreciation of the importance of book analysis kicks in when individual advisors benchmark their fees and consequently understand their gross and operating profit margins.

In the workshop, short-term versus long-term activity is articulated. Short-term activity is defined as actions that are likely to be associated with new revenue coming in the next 12 months. Long-term activity is defined as actions likely to yield revenue after two to three years of priming. Creating powerful strategic alliances, purchasing a practice, growing a junior advisor, and transitioning from commissions to fees fall into the long-term category.

One approach is not more right or wrong than the other. A common problem is that an advisor may get overly excited about the prospect of a particular long-term effort coming to fruition. In his or her excitement, the advisor may focus on the long-term effort exclusively and ignore short-term activity, only to have the single long-term effort blow up at the last minute. The perfect example is when an advisor is consumed with the hope of purchasing a practice that would double his or her revenue. In the end, the seller decides on another advisor. The point: Advisors need to pursue both short- and long-term revenue-generating activities.

Analysis of the Advisor’s Fee Structure

Another component of the monetary analysis is a review of existing fee schedules and comparing them with industry benchmarks. Some advisors learn that they charge significantly more or less than the industry average. Some may learn that they are the lowest-cost provider, but that they are also the provider of the highest-quality, most comprehensive services. In short, they may never have stopped to consider whether their fees were competitive.

For some advisors, the reason for not adopting a competitive fee structure is that they simply fear having a conversation about fees with clients. Whether it is a matter of changing their fees for managing money, introducing a retainer, or adding a planning fee or hourly fee, role-playing the conversation can help advisors confront their anxieties.

Analysis of the Firm’s Financials

Financial management of the business itself includes a look at current and past revenue. Market fluctuation is an obvious reason for vacillation of the top line, but the firm that is not growing over a period of time is likely in decline. Expense analysis using industry benchmarks from Moss Adams helps advisors gauge whether they are overinvesting or underinvesting in their firms. A look at data over time as opposed to a single year provides a legitimate picture of expense management. Advisors calculate their gross profit margin and operating profit margin, and understand and appreciate the value of tracking these key indicators on an ongoing basis. Although comparing expenses with one’s colleagues may not be statistically valid or reliable, sharing and comparing does offer an opportunity for dialogue.

Finally, the book analysis described earlier is combined with the financial data crunched to look at the firm’s productivity measures. Productivity ratios include revenue per household; overhead per household; profit per household; revenue per staff; and number of households per staff.

The out-of-pocket cost to sustain the 80% of households that generate 20% of the revenue becomes a palpable and meaningful concept. The conversation shifts when an advisor recognizes that he or she is losing money to service certain households.

Business Risk and Valuation of the Practice Itself

Five minutes of brainstorming all the risks that advisors face is humbling, and it leads advisors to reassess their future business risk. For example, 10 years ago, technology security wasn’t on most advisors’ radars. Today, that threat is growing annually. Far beyond following best practices for password protection, advisors need to proactively demonstrate vigilance.

One overt risk that an advisor faces is the risk of dying without having prepared the business for transition. Advisors need a documented continuity and succession plan whereby their clients will be taken care of in case of the advisor’s demise. Workshop participants have at least an estimate of the value of their business and an understanding of current terms regarding the transition of financial advisory practices. The steps for putting a plan in place—finding a successor, completing due diligence, negotiating a deal—are both simple and enormous, and they are explored in some depth in the workshop.

It’s All Better When Done Together

There is nothing described in this approach that an advisor can’t do on his or her own. There is no magic in any coaching program, but there is value in going through a structured process in concert with colleagues. Even if advisors are used to analyzing their book, fees and financials, looking at the data in isolation is far less powerful than having the opportunity to diagnose and discuss the results with colleagues. Advisors typically say that it is the interaction with other advisors from which they gain the most value.

So what is the value of 20 people spending two days together to address all these money issues? When asked for the action steps they would take at the end of the workshop, here are several common themes.

Several participants found the Pareto distribution within their book, and most found that they had some clients on whom, given their current fee structures, they lost money. One advisor said that she could lose her bottom 45 clients without it affecting her bottom line.

The book analysis prompted some advisors to conclude that they needed to delegate identified households for servicing by another advisor within their firm or to prune other clients altogether.

About half the advisors needed to form a continuity partnership with another advisor or review the arrangement they currently had in place.

One advisor’s greatest takeaway was to have a much better sense of what to look for when buying another book of business. It is interesting to note how analyzing their own book encouraged advisors to be more diligent and selective about the due diligence they would apply in future purchases.

Several advisors wanted to review their own life and disability insurance, and others needed to consider key-man insurance for their right-hand person or business interruption insurance.

Some participants vowed to start behaving like a CFO and meet with their bookkeepers to stay on top of revenue, expenses, margin and productivity measures going forward. Others simply stated that a deeper understanding of the importance of margin and productivity ratios would help them make better decisions.

One advisor decided to review his service matrix as a means of controlling the services he was providing without financial remuneration.

Several advisors embraced the opportunity to recommit to a new personalized 20-point system to help them track the energy focused on revenue-generating activity, while others wanted to expand their 20-point system by implementing it with all advisors—or a few staff members—within their firms.

Some advisors needed to formalize their fee schedule and put it in writing while others wanted to explore the addition of a planning or hourly fee or a retainer.

It is always intriguing how advisors take away such a wide variety of action items, which simply confirms that independent advisors are totally independent. They are their own best resources when it comes to identifying the most important changes they need to make to shift their practices to becoming better businesses.

In the next and final installment of this series, we review the final in-person gathering of the Power in Practice program.

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